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Why new RMB indices can make a difference

Fireworks explode over Hong Kong's Victoria Harbour July 1, 2002, marking the fifth anniversary of the territory's handover to China. The once proud former British colony is facing a crisis of confidence after being mauled by two recessions in four years. REUTERS/Bobby Yip BY/JS - RTRDHQU
REUTERS/Bobby Yip

A new series of renminbi (RMB) indices has been launched by Thomson Reuters and the Hong Kong Exchange (HKEX). We asked a group of experts what the RXY indices will mean for the industry.

The new index series will provide global market participants with benchmarks that reflect the development of the RMB’s effective exchange rate against a basket of other major currencies.

The intraday RMB currency movements are viewed according to a transparent, rules based methodology which will ensure the indices can be tracked by investment and trading products such as Futures, Options, ETFs and other structured products.

An advertisement poster promoting China's renminbi (RMB) or yuan , U.S. dollar and Euro exchange services is seen outside at foreign exchange store in Hong Kong, China August 13, 2015. German Bund yields edged up on Thursday following efforts by China's central bank to slow a sharp descent of the yuan that has prompted investors this week to seek safe-haven assets. REUTERS/Tyrone Siu - RTR4YZ6M
REUTERS/Tyrone Siu

The Thomson Reuters/HKEX RXY indices are:

  • Trusted — Our FX index experts construct the indices using WM/Reuters rates which are the most widely used reference point for indices and financial contracts globally.
  • Independent — As an independent entity, we do not actively participate in financial markets. We deliver unbiased performance measures.
  • Transparent — The methodology used to create the indices is publicly available and adheres to the International Organization of Securities Commissions’ principles for financial benchmark governance and administration.

At the launch event in Hong Kong on 23rd June 2016, here’s what a selection of industry experts had to say.

Linan Liu, Greater China FIC/Asia Rates Strategist, Deutsche Bank explained that in her opinion the new RXY indices — once they are used as the basis of tradable futures and options (subject to regulatory approval) — will be attractive to investors.

She said: “Credibility and the liquidity provision minimizing the counterparty exposure are factors that make the index clearly attractive for investors.

“As they pay particular attention to the cost of hedging and the cost of accessing the various markets, they will compare the cost of the OTC market with the exchange market.

“The fact that an index is provided by and traded in the Exchange give it growing credibility and will also reduce transaction costs — a net benefit for the user.”

Philippe Shah, Business Manager, Asia Pacific, Thomson Reuters Indices explains the concept of currency indices wasn’t new, stating that since the 1970s the US Federal Reserve had been using a broad dollar index for exchange rate and monetary policy analysis, and that the European Central Bank has a similar basket for calculating the effective rate of the euro.

“In Asia, the China Foreign Exchange Trade System launched its RMB index, which has similar aims.

“Such indices allow for a more representative analysis of a currency to be performed, but they were never meant for market participants or commercial purposes.

“The RXY Indices take the same concept of measuring a currency against a basket of relevant peers but in a way that can be used for the trading and investment community — this is a space Thomson Reuters and HKEX are deeply involved in,” adds Shah.

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Timely development

China’s efforts to make the Yuan a fully tradeable and global currency remain.

In June, The People’s Bank of China (PBOC) said it was studying the possibility of letting local commercial banks trade directly in offshore Yuan in order to increase the two-way opening up of the foreign exchange market.

Patrick Song, Portfolio Manager, CSOP Asset Management said the impact of the RXY indices has the capacity to resonate both in the onshore and offshore markets: “The PBOC announcement means there will be more players who can trade in CNH.”

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Linan Liu also described how allowing more cross border activities and more trading arbitrage opportunities between onshore and offshore markets was a great way of liberalizing capital accounts and allowing more efficient pricing of the RMB exchange rate against the basket of currencies.

She said: “We need to see that market efficiency gain by breaking any barriers between the capital account flow of onshore and offshore institutions. I believe that as long as proper mechanisms and trading instruments are made available the market will fly.”

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Liu Huan, Head of FX and Short Term Interest Rate Trading, Bank of China HK said the RXY indices will make people pay more attention to the value of RMB relative to the currencies of other important global economies, which is what the PBoC wants people to do rather than just focus on the dollar CNY or CNH volatility.

He explained that the index, especially once tradable, makes the PBOC’s job of managing the RMB simpler.

It will direct attention to a more sensible view of the value of the currency which is published on a timely basis according to globally accepted standards.

Historical Performance of TR/HKEX RXY Indices

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TR/HKEX RXY indices are available for market participants to access via Thomson Reuters Eikon or a data feed.

Why Thomson Reuters?

We have over 30 years expertise in the indices business and have calculated many of the most widely-held indices in the world.

Our pure beta indices and smart indices address many investor objectives across asset classes, themes, regions and sectors.

We offer comprehensive institutional-quality solutions and a full service indexing partnership to help you get your ideas to market efficiently. This is backed by our industry leading platform of financial intelligence and trust principles which guarantee integrity.

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